Teva Pharmaceutical (TEVA): Upgrading to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Herman Saftlas
TEVA obtains tentative approval for a generic version of Bristol-Myers' Monopril heart drug (annual sales $269 million). Subject to the outcome of litigation, the company may be eligible for six months of marketing exclusivity. If approval is obtained, we think the drug's first year of profits may be sufficient to offset recently triggered dilution from two convertible debt issues. TEVA has the richest generic pipeline in the industry, in our view, with 61 ANDAs under FDA review. This should translate into continued robust EPS momentum, justifying the stock's premium p-e relative to peers.
Dynegy (DYN): Downgrading to 1 STAR (sell) from 3 STARS (hold)
Analyst: Craig Shere, CFA
DYN's midstream gas business is hurt by lower natural gas and liquids prices, and we see these prices trending down over the next twelve months. The company's wholesale coal-fired generation also realizes weaker margins when gas prices fall. We believe DYN will be incapable of repaying $1.5 billion in preferred shares owned by ChevronTexaco and maturing November, 2003, and think a solution to the obligation could result in meaningful share dilution. We calculate that DYN is now priced at a premium to its energy merchant peers based on p-e and price-to-cash-flow multiples.
Freddie Mac (FRE): Reitering 2 STARS (avoid)
Analyst: Erik Eisenstein
According to the Wall Street Journal, FRE's current safety and soundness regulator, OFHEO, is examining whether the company's new CEO, who was the Chief Investment Officer under his predecessor, was involved in FRE's problematic accounting. We would not be surprised if the current investigations extend beyond recently departed executives. We remain concerned about the investigations' growing magnitude and scope, and we would continue to avoid FRE shares.
General Electric (GE): Reiterate 3 STARS (hold)
Analyst: Robert Friedman, CPA
Sluggish economies and excess global production capacity are primarily behind the 14% drop in GE's second-quarter earnings per share, reported today, to 38 cents. On a preliminary basis, S&P Core EPS rose 13%, to 35 cents. We at S&P believe that GE is on track to post a second year of single-digit EPS growth. Sluggish economies notwithstanding, we believe the chances are slim that GE -- with its huge revenue, asset, and equity base -- will be able to post consistent 10%-plus long-term EPS gains. The stock is trading near our free cash-based $30 per share valuation.
Juniper Networks (JNPR): Reiterate 3 STARS (hold)
Analyst: Megan Graham-Hackett
JNPR posts second-quarter EPS of 3 cents, 1 cent ahead of our estimate on wider gross margin and expense controls. Revenues were up 41% year-over-year to $165 million, $6 million above our estimate, on strength in higher-end/core units and as Americas' sales rose 16% quarter-over-quarter. Book-to-bill was above 1, and deferred revenue rose quarter-over-quarter. Still, the company says visibility is the same as the second quarter. It sees third-quarter sales and EPS only flat from last quarter, just a bit above our model. We are upping our 2003 EPS by 2 cents to 11 cents. JNPR is executing well, in our opinion, but with the shares trading at price-to-sales of 9 times, and 3.8 times book value, above its peers, we wouldn't add to positions.
Georgia-Pacific (GP): Reiterate 2 STARS (avoid)
Analyst: Bryon Korutz
A Senate Judiciary Committee panel voted 10 to 8 yesterday to send a bill creating a national asbestos trust to the Senate floor. The panel agreed to increase the amount paid to victims with lung cancer, to lower payments to those with asbestosis without cancer, and to boost the amount that manufacturers and insurance companies would contribute to the fund to about $52 billion from each group, from $45 billion. We believe the bill still faces challenges in gaining bipartisan support needed to pass a full Senate vote. Given these uncertainties, we would avoid GP shares.